Friday, July 20, 2018
D. Daniel Sokol, University of Florida has written on Vertical Mergers and Entrepreneurial Exit.
ABSTRACT: The idea that tech companies should be permitted to acquire nascent start-ups is under attack from antitrust populists. Yet, this debate on vertical mergers has overlooked important empirical contributions regarding innovation related mergers in the strategic management literature. This Essay explores the extant empirical management literature, which identifies a pro-competitive basis that supports vertical mergers as efficiency enhancing. This literature solidifies the current general vertical merger presumption that favors a a pro-competitive vertical merger policy for purposes of government merger enforcement. However, the pro-competitive benefit for a presumption of merger approval for most vertical mergers does not end with the synthesis of an under-explored literature. Rather, the broader implications of vertical mergers and presumptions of legality have another overlooked implication – a change of policy may dampen entrepreneurial investment and innovation. Entrepreneurial exit is critical to a well-functioning entrepreneurial ecosystem, as the possibility of entrepreneurial exit via vertical merger is now the most usual form of liquidity event/exit for founders and venture capitalists. Vertical merger policy that would unduly restrict large tech firms from undertaking acquisitions in industries as diverse as finance, pharmaceuticals, medical devices, technology hardware, and internet platforms, would hurt incentives for innovation in the economy by chilling business formation in startups. Increased difficulty in the exit for founders and ventures capitalists makes investment in such ventures less likely, since the purpose of such investment is to reap the rewards of scaling a venture to exit. Thus, a general inference that makes vertical acquisitions, particularly in tech, more difficult to undertake leads to precisely the opposite of the purpose of the role of antitrust in promoting competition and innovation. This Essay explores how entrepreneurial exit for founders and venture capitalists is best served by promoting a robust vertical merger policy, though one that intervenes in cases of specific anti-competitive harm.